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Monday, February 14, 2005

Capital flows in Russia at year-end

02.14.2005 RIA RosBusinessConsulting - Russia saw an inflow of capital in the fourth quarter of last year, deputy prime minister Alexander Zhukov told reporters on Friday. He noted it “has yet to be verified" to what extent capital flight from Russia in 2004 was caused by Russian companies' investment abroad. Zhukov rated such investment a positive factor.
Recently, Russian officials have found many such positive factors in the Russian economy. At a conference “Russia's role in the global world," finance minister Alexei Kudrin said Russia, while becoming less attractive to investors and lagging behind China and India in this respect, was “building an open liberal economy," unlike those two countries. He said Russia's per capita GDP measured by purchasing power parity was $9,000 – 50 percent more than in China and 3 times more than in India.
It looks like Soviet propaganda methods had been firmly inculcated in the minds of Russian officials. Terminology changed but the main idea of their statement remains the same. “Even though we have no trousers, we boast a liberal market economy" – this seems to be a motto chosen by the officials, which they think is both clear and patriotic. But comparison with China and India is misleading. Over the past 20 years, Russia's per capita GDP has remained almost unchanged, while in China, it increased 12-fold. Over the past two years, when Russia's economic growth accelerated, China was still ahead, and not only China. As for capital inflow, it's not new for Russia. As a rule, capital inflows are reported in the last quarter of a year, like it also happened in 2003. But annual results are usually less impressive, with different analytical centers and the state statistic figures reporting different figures. Short-lived surplus is then attributed to the advantages of Russia's tax policy, large privatization auctions or some other factors.
It's difficult to judge about such things. Perhaps, the inflow of capital in Russia in the fourth quarter of 2004 was fed by the Yuganskneftegas auction on December 19. As it turned out, only President Putin knew who was behind Baikalfinancegroup – the surprise winner of the auction. It remains unclear where the secretive group had taken $9.35 billion to finance the acquisition. If the money came from some offshore centers, it can be presented as capital inflow. 02.14.2005 RIA RosBusinessConsulting - Back in August 2004, Russia's economy minister German Gref warned capital flight would increase at the end of the year. No doubt, this would have happened had it not been for the Yugansk deal.
Economy ministry officials say capital flight will continue in 2005, and the trend could only reverse in 2006, under effect of structural reforms. And what if the reforms are not effective enough, if prices for energy and metals go down? What if Russia faces negative factors of globalization after joining the World Trade Organization, such as crisis in unprotected industries, rising unemployment and falling consumer demand? It's clear that capital flight will increase in this case.
Of course, Russia can be proud that it has now been granted an investment-grade rating by the world's three leading rating agencies. This inspires more optimism than upbeat forecasts offered by Russian officials. Indeed, an investment-grade rating makes Russia attractive to institutional investors, not only as a source of raw materials and metals. In view of this, a miracle could occur in 2006, and Russia might report a net inflow of capital.

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